I'm an associate editor at Forbes, reporting on personal finance from my outpost in a Modernist house in New Canaan, Conn. I have a law degree, and I write about how to build, manage and enjoy your family's wealth.
Since I joined Forbes in 1997, my favorite stories have been on how people fuel their passions (historic preservation, open space, art, for example) by exploiting the tax code. I also get into the nitty-gritty of retirement account rules, estate planning and strategic charitable giving. My favorite Forbes business trip: to Plano, Ill. to report on the restoration of Ludwig Mies van der Rohe's Farnsworth House, then owned by a British baron. Live well.
Follow me on Twitter: http://www.twitter.com/ashleaebeling
Send me an email: aebeling@forbes.com

Connecticut's Gift Tax Loophole

In the current issue of Forbes, in The $5 Million Question, I wrote about how estate planners are telling clients about a “historic” opportunity to transfer millions to kids and grandkids, taxfree if they act by Dec. 31. Congress quintupled the old $1 million federal gift tax exemption for 2011 and 2012 (it’s actually $5.12 million, indexed for inflation for 2012), but it’s set to revert to $1 million Jan. 1 if Congress doesn’t act. Hence the urgency to make big gifts now.

But what if you live in Connecticut—the only state left with a gift tax? (In May, Tennessee legislators repealed Tennessee’s gift tax retroactive to Jan. 1, 2012.)

For Connecticut residents aiming to use the full $5.12 million federal exemption, the giveaway is complicated by the state gift tax. Connecticut taxes lifetime gifts totaling more than $2 million with a top rate of 12%. If Connecticut residents try to use the whole $5.12 million, it could mean an extra $240,000 of Connecticut gift tax, says Karen Yates, a private client/estate lawyer with Withers Bergman in New Haven and Greenwich.

But even Connecticut residents have the opportunity to use the full $5.12 million exemption without paying the extra Connecticut tax by giving away out-of-state assets. Connecticut’s gift tax doesn’t apply to real property or tangible personal property located out-of-state. So if you’re a Connecticut resident but you own a Cape Cod (Mass.) beach house with an Alex Katz oil in the family room, you can make a gift of that property (the house and the painting) without paying gift tax. (But watch out—if the property is held in a limited liability company, it would be subject to Connecticut gift tax; clients need to keep their estate lawyer up to date on what they own and where, and how it is titled.)

For the first $2 million, Connecticut residents can gift any kind of property but what makes the most sense is to transfer assets expected to appreciate or that can be valued at a discount (shares in a family business, for example). To get to the full $5.12 million, you give away out-of-state assets.

Connecticut’s gift tax dates to 1991. Before 2005, the tax was based on how much property was given away each year, and you had to pay tax at rates of 1% to 6% once you gave away more than $25,000 a year. Now the Connecticut gift tax counts the aggregate amount of “lifetime” gifts from Jan. 1, 2005 on towards the current $2 million exemption in effect since Jan. 1, 2011. This means that folks who made substantial gifts before 2005 may still have their entire $2 million Connecticut exemption available to use to make gifts without paying state tax.

Yates says that a lot of her firm’s clients are repeat clients. “People are giving away bigger chunks of their wealth now that the rates permit it,” she says. “People are worried about what the government will do next.”

If you want to get into the legislative weeds, check out this General Assembly Office of Legislative Research report on the history of Connecticut’s gift tax, estate tax and the old succession tax.

See also: Where Not To Die In 2012 for an interactive map showing which states levy an estate or inheritance tax in 2012.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.